#9 from 2012: 'Why Nations Fail': The Constitutionalists Were Right All Along

Daron Acemoglu and James Robinson have produced a magisterial book: ‘Why Nations Fail’. If you are interested in governance, nay, if you are interested in development, you should read it. I picked it up the week it was published and I could not put it down until it was done. That is how powerful and well-written it is. Yet it is over 500 pages long. In what follows, I am going to focus on what I liked about it and the thoughts it provoked in me as I read it.

First, I admire the simplicity and power of the thesis: what the historical evidence suggests is that nations with inclusive political and economic institutions are capable of sustained growth. Nations with extractive political and economic institutions are not. End of story. Even when an authoritarian state/regime appears to engineer economic growth for a while, it will hit a limit soon enough. Why? Human creativity, human inventiveness and necessary creative destruction of old ways of doing things cannot happen in authoritarian environments. Vested interests are able all too easily to block threatening entrants to the economy; property rights are not secure and so on. Those who control political institutions use their power to extract surpluses in often brutal ways. Key quote:

Nations fail today because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction. Extractive economic and political institutions, though their details vary under different circumstances, are always at the root of failure. (p. 372)

Second, I admire the fact that the basic thesis is then illustrated ambitiously and at scale. Stories are told about different contexts at different points in history. By the end, though I am sure regional specialists will argue with the authors about this or that detail, you are left in no doubt that the basic thesis is sound…and that the case is well made. In this regard, I would like to point out that I am particularly impressed by the African stories in the book…stories from the past as well as from the present. When you read the book, watch out for the touching story of the chiefs of Bechuanaland who mobilized to out-maneuver Cecil Rhodes. I point this out as an African who often finds that big books that make sweeping claims about the world we live in do not usually talk about Africa at all.

Third, while this work is big and ambitious it is also amazingly humble. The authors admit that their theory has little predictive power. Why? Because all the success stories depend on critical historical junctures and contingency…in plain terms, pure luck. Things could have turned out very differently if the wrong leader was there, a particularly battle had ended in a different way, and so on. Which is why –mercifully, in my view -- the authors offer very few policy prescriptions.

Finally, ‘When Nations Fail’ is impressive because at the end of it all it is an empowerment story. Basically, the overarching suggestion is that if you want to create a virtuous circle of prosperity build inclusive political and economic institutions. The word ‘inclusive’ is the key. The argument of the authors is that while states need to be effective and capable -- a fundamental requirement – they need to be open and inclusive. The authors make the case for governance shaped by broad-based, pro-reform coalitions. They argue, logically, for the role of free media (pages 324-5, and 461-2) and so on. In other words, don’t believe the authoritarian growth hype. Key quote:

What is common about the political revolutions that successfully paved the way for more inclusive institutions …is that they succeeded in empowering a fairly broad cross-section of society. Pluralism, the cornerstone of inclusive political institutions, requires political power to be widely held in society, and starting from extractive institutions that vest power in a narrow elite, this requires a process of empowerment. (p. 458)

To conclude, as I read ‘Why Nations Fail’ it became clear to me that it is a political economy (and, therefore, more comprehensive) version of the basic tenets of liberal constitutionalism. The authors argue for strong and inclusive political and economic institutions as the keys to sustainable development. Well, that is what liberal constitutionalists have always said: that you cannot secure liberty and accountable governance unless you have a strong set of political institutions organized in a particular way. Consider the set of institutions argued for by liberal constitutionalists over time: limited government, separation of powers, checks and balances, judicial review of administrative action, independent media, transparency and freedom of information and so on. As Charles Howard McIwain states in the classic text, Constitutionalism: Ancient and Modern (1940):

The two fundamental correlative elements of constitutionalism for which all lovers of liberty must yet fight are the legal limits to arbitrary power and a complete political responsibility of government to the governed.

I take Acemoglu and Robinson to be saying that setting up these institutions is not just about securing individual liberty; it is also what allows for the setting up of those inclusive economic institutions that make sustained development possible.

Comments

Thanks Sina. I will buy it for my summer reading. From your summary it reads a lot like another book I recently read by Willaim Bernstein -= "The Birth of Plenty" - in which he argues that four factors are essential for a nation to make economic progress. Berstein is not an economist! He is a neurologist!
Bernstein’s main hypothesis is that institutions - the framework within which human beings think, interact, and carry on business - are the foundation of national economic performance. More specifically, four institutions stand out as prerequisite for economic growth:
• Secure property rights, not only for physical property, but also for intellectual property and one’s own person (civil liberties). The rule-of-law that is necessary to protect property rights and contracts and thus provide an environment within which financial organisations can lend to borrowers who will set up businesses that generate employment and contribute to prosperity;
• A widely available and open source of funding for the development and production of new inventions - the modern capital market;
• A systematic procedure for examining and interpreting the world – the scientific method, e.g. scientific rationalism; and
• The ability rapidly to communicate crucial information and transport people and goods (built and operating infrastructure)

In a nutshell - "those that fail to study the lessons of history............" I am halfway through this book and love it, lots of historical anecdotes concerning the failures of nation states to adapt to change and accept innovations and secure property rights. Reflecting on the historical record, I had never thought of the impact that the bubonic plague had in encouraging the spread of labor rights in England nor of the advantages that the US had in terms of having (at least initially) no gold nor a large indigenous population for the colonizers to co-opt. The attempts by FDR to pack the Supreme court with judges to his liking is also instructive in terms of present debates about the constitutionality of Obamacare and the like (Citizen's United). This book should be required reading to anyone interested in the history of economic development and emerging markets.

Big fancy words - "inclusive political and economic institutions, capable of sustained growth" and "extractive economic institutions". Why make it so complex? The simple truth is "Capitalism works, socialism doesn't!" The left is determined to take the United States the way of Europe. Communism failed because it couldn't compete with Capitalism. The free market provides the incentives for the people to be innovative, creative and risk takers. The left refuses to accept the truth because it doesn't fit what they want to believe. What was it Einstein said? "Doing the same thing and expecting different results is insanity." That's the left. They want to play the same socialist song and because it's "American" they think they will get different results. Insane!

I would certainly rank this review as the best way to begin the New Year 2013. In Manipur in the eastern corner of India bordering Burma, power is conspicuous by its non-availability. Hence we go without internet for days on end. I could access the World Bank Public Space mail only today (5 January 2013) after I have come to Delhi for an official work. Their earlier work on Democracy and Dictatorship was absolutely wonderful. Now I have learnt of another effort from the team from your review. I shall definitely buy the book in right earnest.
Amar Yumnam
Professor: Department of Economics
Manipur University, India

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